Chinese outward investment: More opportunity than danger

While ignoring China’s investment overseas would be unwise, the attention paid to it now may be a bit excessive. Five years ago, Chinese outward investment was an afterthought; it certainly has become far more than that. Yet, though important elements of the situation have changed, others have not.

Chinese investment is not taking the world by storm financially, nor will it do so in the near future. It does not pose a major threat to the U.S., either in terms of the purchase of American assets or in terms of the expansion of Chinese influence around the globe. An effective response is fairly simple.

American policy concerning Chinese investment should be more transparent. Overseas, the best reply to rising Chinese commercial influence is to expand American commercial influence, for instance, through free trade agreements. These steps will help to create more economic opportunities in the U.S., will enhance America’s global position, and pose no threat to national security.

The Heritage Foundation’s China Global Investment Tracker is the only publicly available dataset in the field. The tracker currently contains more than 250 Chinese investments in all countries from the beginning of 2005 through the end of June 2011.

It excludes both bond purchases and transactions smaller than $100 million. Small transactions are not important in the totals, but they do matter to sectors, national markets, and sub-national markets that see less activity. Bond purchases are heavily concentrated in the U.S. and are examined separately.

The tracker also contains data on more than 100 large engineering and construction contracts signed since the beginning of 2005, valued at over $100 billion cumulatively. These are not investments, but they are necessary to provide a complete sense of the People’s Republic of China’s (PRC) global activity. Finally, the tracker offers a list of 70 failed or seriously disrupted transactions valued at over $150 billion.

There are multiple ways to measure Chinese investment. The Heritage Foundation stresses comparability and policy relevance. Acquisitions of stakes in companies may not always technically qualify as direct investment, but they are equally relevant to policymakers. Figures issued by the individual countries in which the PRC invests can be useful in isolation but are generally not comparable. Because it is based on corporate data rather than national data, the Heritage method can be applied to every country in exactly the same way, offering genuinely comparable results.

Heritage’s figures are similar to those released by China’s Ministry of Commerce. This is somewhat odd because the ministry claims to use different methods (the State Administration for Foreign Exchange publishes yet different numbers). The Ministry’s treatment of Hong Kong as attracting almost two-thirds of investment, even though Hong Kong is merely a transit point for most of the money, may bring its totals closer to the Heritage totals. In any case, the Heritage dataset is far more timely and offers much more useful information on countries and sectors than do official Chinese data.

It is worth noting that both series show only moderate investment growth since 2008. The financial crisis had an impact in late 2008 and early 2009, and while there was a clear recovery, there has not yet been a return to the powerful growth before the crisis. It may be that global asset markets cannot absorb much more than $60 billion in Chinese investment annually. This is a notable sum, of course, but it is paltry in comparison to the roughly $10 trillion in American foreign direct and portfolio investment recorded through 2010, as well as annual fluctuations in American investment that are far larger than $60 billion.

China Invests: Why and Who

The PRC’s outward investment commands global attention because the potential amounts seem to be very large. At the end of March 2011, official foreign exchange reserves exceeded $3 trillion and were climbing rapidly.

Over half is stored in low-yield U.S. government bonds, and Beijing would like to move some of that elsewhere if possible. This conceivably could double or triple the stock of Chinese investment outside of bonds, making it appear that a tidal wave of Chinese money is possible.